The Many Ways Amazon Could Price a Successful Tablet

Amazon.com’s anticipated tablet is expected to cost between nothing and $400, depending on whom you ask. Clearly, part of the pricing equation depends on what capabilities and hardware the product, or products if there are multiple device sizes, will actually offer and use. So until Amazon (AMZN) officially announces its tablet entry, nobody really knows how much it will cost and what it can or can’t do. Will it be more of an e-book reader; a pure, full-featured tablet with e-book software; or, like the Nook Color, something in between?

The best bet is the third option, which should keep the price under $250, especially if Amazon decides on the highly portable 7-inch screen size. A number of clues lead me to that conclusion. An Amazon tablet is sure to support Kindle reading software, but I’m not sold on reading Kindle content on a large, heavy device for extended periods at a time. There’s a reason Barnes & Noble’s Nook Color is dubbed “the reader’s tablet” by the company: It’s small and light enough to be a full-time e-reader. And like Barnes & Noble (BKS), Amazon has its own curated application store for Android software, indicating an Amazon tablet will run modern software titles, unlike a dedicated device like the Kindle.

Media Choices, Software, and Screen

Amazon’s Kindle has helped define the e-book market, and it wouldn’t surprise me if the company continues to leverage the Kindle experience on its own tablet. While Kindle books can be read on nearly any other tablet, Amazon could opt for a dual-display on its tablet. New technologies that replicate eInk in one mode and a more traditional LCD experience in another mode have been demonstrated over the past few years but haven’t found their way into mainstream products. Aside from the eInk benefit when needed specifically for e-books, these displays require less energy to run.

Amazon’s digital content isn’t limited to books, though; the company also has media options available to it and devices that run on Google’s (GOOG) Android platform. Amazon’s MP3 music store is becoming the standard shop for Android music lovers, often pre-installed on Android devices. The service integrates with Amazon’s Cloud Drive and Cloud Player app, allowing music to be bought on the handset for direct download or for immediate streaming over Wi-Fi or mobile broadband. Amazon’s Unbox service provides video content—the amount of which was recently expanded to 100,000 titles—that could also be brought to an Amazon tablet.

A “Win-Win” Subsidy

What do these options have to do with the price of an Amazon tablet? Amazon has more options than any other tablet-maker that could be used to subsidize the cost of a tablet. For example: The full price of an Amazon tablet may be $350 so that the company covers costs and makes a small profit. But what if the price was lowered to $299 as long as buyers agreed to see ads for Amazon’s daily deals or other shopping specials, similar to how Amazon sells the Kindle for $25 less with Amazon offers? In this case, Amazon wins more business as the tablet becomes a shopping portal and customers win with low prices on products.

Take it a step further. Could Amazon further drop the price to $199 and take a loss on the hardware provided customers agree to rent a set number of movies or buy an MP3 album each month? Maybe the $199 tablet comes with a year of Amazon Prime (free two-day shipping) service; based on the increased number of purchases I’ve made since getting Amazon Prime, the company could easily recoup the tablet subsidy in short order. The point is: Amazon has levers that few others can pull in the tablet space in terms of price flexibility.

How Much Will Consumers Pay?

It’s becoming clear that tablets competing with the iPad are unlikely to do well if priced like an iPad. Even with $100 price reductions, there’s no guarantee of success, and it’s not until a decent product goes on a $99 fire sale before consumers buy a non-iPad like frenzied sharks in a school of fish. So no matter what Amazon’s tablet(s) look like or can do, I don’t expect to see a $499 price point. Instead, similar to the Kindle, there could be multiple, lower price points, depending on what other Amazon services a consumer will accept with the tablet.

Although we don’t yet know all the details of what an Amazon tablet will look like or what it will be able to do, what’s your take on the price? Do you think Amazon will build an Android tablet with an interface better than existing Honeycomb tablets and price it for less, or will the company try to take on Apple (AAPL) at $499?